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International Summer Program

July 11th, 2011, Michael Elbert

ECB & Fed


A comparison

Agenda
Introduction
European Central Bank
Federal Reserve System
Summary: ECB and FED

Michael Elbert

ECB & Fed - A comparison

Central Banks

A central bank, reserve bank, or monetary authority is the entity


responsible for the monetary policy of a country or of a group of
member states. It is a bank that can lend money to other banks in
times of need. Its primary responsibility is to maintain the stability of
the national currency and money supply, but more active duties
include controlling subsidized-loan interest rates, and acting as a
lender of last resort to the banking sector during times of financial
crisis (private banks often being integral to the national financial
system). It may also have supervisory powers, to ensure that banks
and other financial institutions do not behave recklessly or
fraudulently.

Most richer countries today have an "independent" central bank, that


is, one which operates under rules designed to prevent political
interference. Examples include the European Central Bank and the
Federal Reserve System in the United States.

Michael Elbert

ECB & Fed - A comparison

Direct Influence of Euro and US-Dollar


in the world

Michael Elbert

ECB & Fed - A comparison

Key Characteristics

Michael Elbert

ECB & Fed - A comparison

Agenda
Introduction
European Central Bank
Federal Reserve System
Summary: ECB and FED

Michael Elbert

ECB & Fed - A comparison

ECB History
See ECB History Video:
http://www.ecb.int/ecb/educational/movies/history/html/index.en.html
1972 1979

3 Stages:
Stage 1: 1990 1994
Stage 2: 1994 1999
Stage 3: Since 1999

Collapse of the Bretton


Woods System

First attempt of
European
monetary
cooperation:

European
Monetary System
(EMS)

Treaty on the
European Union

Snake in the
Tunnel

1944 1973

4 Stages:
Stage 1: 1979 1983
Stage 2: 1983 1987
Stage 3: 1987 1992
Stage 4: 1992 1993

Michael Elbert

ECB & Fed - A comparison

Convergence Criteria
Government finance

Exchange rate:

Annual government deficit:


Government deficit must not
exceed 3% of GDP
If not, it is at least required to
reach a level close to 3%.
Government debt: The ratio
of gross government debt to
GDP must not exceed 60%

Applicant countries should


have joined the exchange-rate
mechanism (ERM II) under the
European Monetary System
(EMS) for 2 consecutive years
and should not have
devaluated its currency during
the period.

Inflation rate:

Long-term interest rates

No more than 1.5 percentage


points higher than the three
lowest inflation member
states of the EU.

The nominal long-term


interest rate must not be
more than two percentage
points higher than in the
three lowest inflation member
states.
Purpose of setting the criteria: Maintain the price stability within the Eurozone even with
the inclusion of new member states.

Michael Elbert

ECB & Fed - A comparison

Eurozone

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ECB & Fed - A comparison

Benefits of the Euro

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ECB & Fed - A comparison

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1 Central Bank 17 National Central Banks

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ECB & Fed - A comparison

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ECB Independence

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ECB & Fed - A comparison

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Tasks of the ECB (1/2)

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ECB & Fed - A comparison

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Tasks of the ECB (2/2)

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ECB & Fed - A comparison

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Tasks of the NCBs

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ECB & Fed - A comparison

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Organizational Framework of the


Eurosystem

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ECB & Fed - A comparison

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Price Stability Primary Objective

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ECB & Fed - A comparison

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Price Stability - Definition

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ECB & Fed - A comparison

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Benefits of Price Stability

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ECB & Fed - A comparison

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The ECBs Monetary Policy Strategy

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ECB & Fed - A comparison

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The Monetary Policy Instruments

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ECB & Fed - A comparison

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The Monetary Policy Instruments


Non-Standard Measures

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ECB & Fed - A comparison

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Agenda
Introduction
European Central Bank
Federal Reserve System
Summary: ECB and FED

Michael Elbert

ECB & Fed - A comparison

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The Federal Reserve System:


Origins
1870 to 1907:
US had lots of financial panics
(bank runs)
Banking crisis in 1907
 Federal Reserve Act was found
in 1913 including the foundation
of Federal Reserve Banks

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ECB & Fed - A comparison

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Federal Reserve Banks


12 Districts:
Each is a Private Non-Profit Organization and Chartered
Banks
Owned by commercial bank members
Overseen by both
Board of Directors
Board of
Governors in
Washington

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ECB & Fed - A comparison

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Organizational Framework of the


Federal Reserve System

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The Board of Governors


Structure
7 Governors including a Chairman
and Vice Chairman
Serve 14 year terms
Appointed by the US-president

Functions

Ben Bernanke, Chairman

Analyze financial and economic conditions


Administer credit protection laws
Supervise and regulate the Reserve Banks
With Reserve Banks, regulate and supervise the
financial system
Collect and publish statistics
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ECB & Fed - A comparison

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Federal Open Market Committee


FOMC Membership:
7 Governors
President of the Federal Reserve Bank of NY
4 of the remaining 12 Reserve Bank
Presidents in rotation

Function:
Set the Federal Funds Rate

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Tasks of the Federal Reserve System


Governments Bank
Issue currency
Maintain the Treasurys account
Manage the Treasury debt

Bankers Bank

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Hold Reserve Deposits


Operate the Payments System
Make Discount Loans at the Discount Rate
Supervise and regulate financial institutions
Collect Data
ECB & Fed - A comparison

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Federal Reserve Bank of NY


New York Fed Only:
Auction Treasury Securities
Foreign Government Services
Monetary Policy Operations
Fedwire: Large Value Interbank
Funds Transfer System

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Main Objectives of the Fed


There are 3 equal objectives:
Price stability
not defined, but widely viewed as 1-2% comfort zone

Maximum employment
Moderate long-term interest rates

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The Monetary Policy Instruments


Open market operations
 Buying and selling of government bonds on the open
market

Discount window
 Instrument that allows MFIs (Monetary Financial
Institutions) to borrow money from the Fed usually on a
short-term basis

Reserve requirements
 sets the minimum reserves each MFI must of customer
deposits and notes

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ECB & Fed - A comparison

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New Monetary Policy Instruments


A Response to Financial Crisis 2008

Term auction facility


Term securities lending facility
Primary dealer credit facility
Interest on reserves
Term deposit facility
Asset Backed Commercial Paper Money Market
Mutual Fund Liquidity Facility (AMLF)
Commercial Paper Funding Facility

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ECB & Fed - A comparison

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Assessing the FEDs Structure


Independence from Political Influence
Long terms
Irreversible Policy Decisions
Budgetary Independence
Decision-making by Committee
12 voting members
Two events provide the foundation for Fed independence:
1. In 1935 political appointees were removed from the
FOMC
2. In 1951 President Truman supported the Feds refusal to
purchase Treasury securities that the Secretary of the
Treasury requested they buy
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ECB & Fed - A comparison

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Agenda
Introduction
European Central Bank
Federal Reserve System
Summary: ECB and FED

Michael Elbert

ECB & Fed - A comparison

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Summary ECB and FED


Established/ Made independent

Eurosystem

Federal Reserve System

1998

1914
Federal Open Market Committee (FOMC),12

Governing Council, comprising 22 members:


Monetary policy decision-making body

members: 7 Board Governors, President of the

the ECB Executive Board (6 members) and the New York Fed, and 4 of the 11 other reserve
Governors of the 16 NCBs of the Eurosystem

banks FedPresidents on rotating basis; 19


participants

Governors (14 year terms)/Chairman(4 year


President and Governing Council members
Appointment of policy makers

term) appointed by the President and

appointed for 8 years by national governments; approved by the Congress; Bank Presidents
ratified by European Parliament

selected by Bank directors (largely local


banking/ business community)

Yes. Fed is a creature of the Congress and


Independence from political influence

Yes. Enshrined in the Maastricht Treaty

must report regularly, but enjoys substantial


independence by long-standing tradition

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ECB & Fed - A comparison

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Eurosystem

Federal Reserve System

Monetary policy objective(s)/ Mandate

Multiple objectives: to promote maximum


Price stability is the primary objective as set in employment, price stability, and moderate
the Maastricht Treaty. The ECB has quantified long-term interest rates. Price stability not
this as medium-term inflation goal of below defined, but widely viewed as 1-2% comfort
but close to 2%
zone (skewed toward upper portion) for core
PCE inflation

Monetary policy strategy

Two pillar strategy. First pillar focuses on


shorter-term economic and pricedevelopments
(economic pillar); Second pillar focuses on
longer-term inflation outlook based on
monetary analysis

Focus on economic forecasts; rates adjusted to


optimise expected outcomes and minimise risks
of deviating from those outcomes (factoring in
costs of those deviations). Preference
forgradualism unless risks dictate more
aggressive action

Consensual, with the President assuming the


role of moderator; dissents are rare

Consensual (less so under Bernanke than


Greenspan), with Chairman clearly first among
equals. Dissents are infrequent, multiple
dissents are very rare

Both play a significant role

Neither plays a significant role independent of


their effects on growth and inflation

Decision-making style

Role of monetary
aggregates and asset prices

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Eurosystem
a.

Immediate press conference after Council


meetings with introductory statement and
Q&A (2:30 pm local time)

b.

Annual Report to EU institutions and


presentations to the European Parliament

Accountability and transparency

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c.

Monthly Bulletin published

d.

Speeches

ECB & Fed - A comparison

Federal Reserve System


a. Immediate announcement following the
FOMC, with voting record (2:15 pm local
time)
b. Meeting minutes three weeks later
c. Full transcripts of meetings five years later
d. Frequent speeches by FOMC participants
e. Semi-annual monetary policy report to
Congress; other hearings

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Conclusion
Rule-based
= one response to every economic
situation

Discretionary
= come to a decision
case-by-case

+ consistency
+ plausibility
+ predictable
+ quick decisions !?

+ flexible
+ best reaction !?

ECB &
- a new central bank and
currency
- a heterogeneous area

Fed & $
- an established central
bank and currency
- a homogeneous area

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ECB & Fed - A comparison

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Michael Elbert

ECB & Fed - A comparison

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